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In memory of Kenneth J. Arrow, member of the BGSE Scientific Council

February 2017

We are deeply saddened by the news that Barcelona GSE Scientific Council member Kenneth J. Arrow has passed away at age 95. Professor Arrow was a member of the BGSE Scientific Council since the beginning, and we are grateful for the insights and advice he shared with us over the years. We will miss him very much at the 10th Anniversary Scientific Council Meeting this spring.

"To measure Arrow you need extra dimensions," said BGSE founder Andreu Mas-Colell. "The surprising thing about him is that he only got one Nobel Prize."

Barcelona GSE Chairman Ramon Marimon (EUI, UPF and BGSE) has written the following reflections on Professor Arrow's life and contributions to academia, science, and institutions the world over.

In memory of Kenneth J. Arrow

As in other sciences, the best social scientists are known for their theories and specific contributions. This can certainly be said of Kenneth Arrow, arguably the greatest economist of the 20th Century, and one might need to simply cite an amazing, long list of contributions, publications and prizes, which can already be found on the web. But, I would not be doing justice to the man who entered the core of Economic Theory and changed it forever. Other Nobel Laureates have also been at the foundations of modern economic theory, but even among them, Arrow stands out. Not just for being, at 51, the youngest winner of the prize in economics, but for the breadth and depth of his contributions, for his far-sighted ideas, which later became fully fledged theories and fields of research.

Just as theoretical physicists have followed the quest for a unified theory, the successes and shortcomings of that search have marked, and continue to mark, the development of physics and related disciplines, 20th Century economic theorists have developed three related theories, with a unified axiomatic foundation - social choice theory, general equilibrium theory and game theory, which now pervade all areas of economics and other social sciences. Ken Arrow was a pioneer in their development and, at the same time, had the intellectual honesty to point out their main shortcomings by keeping a lucid eye on real social problems.

I once asked him about corporate governance, whether we could view the problem of a Board making investment decisions as an example of his abstract work on social choice theory. He told me that it had been exactly the other way around when, as a possible PhD thesis topic, he started thinking about the decision problems faced by corporate Boards and then realized it was instead a general social choice problem, one for which he found a paradoxical answer, and which, after a few more weeks of intensive work, became the well-known ‘Arrow’s impossibility theorem’ on the impossibility for a board, without a president-dictator, to make collective decisions as a single rational agent does. He was a convinced liberal democrat, but this was not a criticism of democracy – as it has sometimes been misportrayed – but rather a lucid, scientific finding on the limits of collective decision making. In fact, later in his life, he preferred to refer to it in a positive sense, as a ‘possibility theorem,’ showing which restrictions were needed in order to make rational collective decisions.

Similarly, in his foundational work on general equilibrium theory – partly joint, partly in parallel with Gerard Debreu - he didn’t stop once the mathematical model was properly laid out, and their main theorems proved, even if their results on the existence and the efficiency of a competitive equilibrium were recognized landmarks in the history of economic thought, a long scientific way from the intuitive ideas of Adam Smith in the 18th Century and the first analytical treatments by Leon Walras in the 19th Century.

Arrow proceeded in two different directions that proved very fruitful for the development of economics and finance. One, based on the strength of the theory showing how financial markets – trading the ‘Arrow securities’ – could help to implement efficient competitive markets in a world where people faced an uncertain future. Not that he thought that it could be done easily, but he needed to set the benchmark and this benchmark, together with his work on the second welfare theorem – implementing efficient allocations with competitive prices - has been foundational for finance theory and modern dynamic macroeconomics.

The second direction was broad and open, based on the limits of the theory, and path-breaking papers set the stage, for what would become the economics of information (in the perfect competitive equilibrium people do not hold private information, whereas he knew that people do); health economics (thinking how doctors, patients and insurance companies interact); and the economics of innovation (the ‘Arrow effect’ explaining why a monopolist may have less incentive to innovate, thus making obsolete his own products), among others. He loved new problems and coming up with new solutions.

But he was also a remarkable scholar, social scientist and human being. He was always willing to experiment (e.g. creating the Santa Fe Institute, with other physics Nobel laureates, for the study of complexity theory), willing to give advice (to U.S. presidents, in the Council of Economic Advisors of J.F. Kennedy, as well as catholic popes, in the Accademia Pontificia, and indeed to whoever asked him for it), willingto help build institutions and programs- for example, to improve health conditions in developing countries (chairing the U.S. National Institute of Medicine), or higher education and economic research in Barcelona. It is in this dimension that we, at ‘Barcelona economics’, owe him the most. He gave the inaugural lecture of the Universitat Pompeu Fabra on “Excellence and equality in education”, dealing with a “serious problem: the conflict existing between the idea of a selective university and the ideals of equality and democracy” – and was an active member of the Scientific Council of the Barcelona GSE, for example, he was involved in the discussion on how to improve the connection between the two campuses (UAB and UPF).

Ken Arrow also pioneered endogenous growth theory by showing how far countries can go by the simple process of ‘learning by doing,’ but now I realize he was referring to his own life…he really did an incredible lot!

Ramon Marimon
Professor of Economics
European University Institute and Universitat Pompeu Fabra
Chairman of the BGSE Board of Trustees